Natural Gas Forecast: TTF Crashes 18% as Henry Hub Faces a Massive Short Squeeze

In this report: After the midterms dealt Republicans a blow, the market priced out strikes on Iran and TTF lost 18% in a week, but the shortage didn’t leave with the premium. The polar vortex is breaking down and NOAA’s outlooks show the first signs of cold, while funds in $NG stay at their most short in at least two years.

Last week.

HH +3.4% (+$0.1) Open $2.890 High $3.040 Low $2.839 Close $2.998

TTF -17.7% (- EUR 18.36) Open EUR 104.10 High EUR 104.10 Low EUR 83.56 Close EUR 85.59.

View

Mixed Signals From Washington

Coming into the midterms, it seemed highly likely that strikes would resume immediately after. The market was pricing these attacks with TTF reaching over 100 EUR. On Monday the 2nd of November, a day early, we heard reports of the US bombing Qeshm island, however, this wasn’t the immediate continuation of attacks people were waiting for.

Last week we reported how, considering the market was pricing so confidently for attacks, each day that passed without attacks would push TTF prices lower and lower. Sure enough, we heard very little in the way of concrete decisions following the bombing of Qeshm island. We were stuck in a rollercoaster of being told “attacks are likely,” then “attacks are unlikely,” followed by “attacks are likely again.” We have heard those two lines so often that they barely move the markets, people want more concrete evidence. The real market mover came on Tuesday as Washington approved Iran’s memorandum of understanding. News like this in a market pricing confidently for attacks causes violent volatility, and that it did, with price dropping over 9% in under 10 minutes.

War or No War, Europe Is STILL Short

TTF lost 18% last week, but the shortage did not leave with the strike premium. EU storage peaked near 75% on 27 October and has fallen every day since, to 72.65%, according to GIE. Net withdrawals went from 0.8 TWh a day to 4.6 in nine days, and winter has barely started. Another piece of news we got on Tuesday, this time from Iran, was that they were going to open the Strait of Hormuz to India, China, Iraq and most importantly, Qatar. In an ideal world, this would help Europe’s shortage; however, Qatar can’t simply press a big green export button and have flows back to normal. The heavy attacks they sustained in March seriously hindered their export ability and reports claim it could take over three years for Qatar to return to normal production.

Even after the fall, TTF is about €25 above its five-year average for this week. The market priced out the strikes, not the shortage. It is also important to remember, although the market is pricing out strikes, that doesn’t mean strikes are impossible or even that unlikely. We have not had any news we haven’t heard several times before. We fell particularly hard this week not because a deal is looking so certain, but because attacks were looking so certain the week before and failed to come.

Henry Hub: Weather

The polar vortex is breaking down and it’s time to start putting on your winter coats. The cold we flagged last week is starting to show up in its outlooks. Last week’s maps had no below-normal area anywhere in the Lower 48. The 6 to 10 day outlook now has the eastern US near to below normal early in the period, with the Southeast coast leaning coldest. By 16 to 22 November a trough moves into the Rockies and NOAA favours near to below normal across much of the West.

The week 3 to 4 outlook leans below normal over the Four Corners and much of Texas, and NOAA says some models bring colder air into the Southeast in week 4. NOAA ties that pattern to El Niño creeping along the southern tier more than to the vortex itself. With funds at their most short in two years, cold arriving in the forecasts is the last thing they want to see. The vortex is breaking down, and the cold is arriving from the west and south.

EIA Report

The 77 Bcf build for the week ending 30 October was 4 Bcf below the 81 Bcf analysts expected (Teleborsa), but 16 Bcf above the five-year average of about 61 Bcf. Stocks reached 3,801 Bcf, 54 Bcf (1.4%) above the five-year average and 109 Bcf below a year ago, according to EIA. The surplus grew for the second week in a row, up 16 Bcf from +38 Bcf, after ten straight falls from +198 Bcf on 7 August. South Central added 40 Bcf, the most of any region. That is two rises in a row, so this is beginning to look more like a turn, not a blip. More in the EIA Gas Inventory.

The Net Net

So the main story this week is Iran and the polar vortex. The attacks everyone and their mother were expecting to follow the midterms didn’t come, or at least not to the scale people expected as the bombing of Qeshm island failed to reignite the conflict.

TTF: TTF lost 18% last week and still sits about €25 above its five-year average for the week, so the market priced out the strikes but not the shortage. Storage is draining at around 4 TWh a day with winter barely started, and Qatar can’t simply switch its exports back on. The market fell about 9% in ten minutes on one unconfirmed report last Tuesday. The market is pricing peace before a deal is made.

A renewal of attacks would push price back up towards 100 EUR. However, that isn’t a very tradeable event as we have seen how fast the market responds to this news. What we are looking out for is, if a deal is reached, how low do prices go? Europe is still short, Qatar’s exports are still limited, and everything won’t return to normal on day one, but prices could. Panic selling the news of a deal could push prices temporarily lower than the deal justifies. We will be monitoring how far they drop, looking for potential buying opportunities on the basis of the shortage still being a very real issue.

Henry Hub: Funds are at their most short in at least two years, and as we said last week, a crowded market is not a reversal signal on its own. It can get more crowded, and it did, by another 19k contracts. What has changed is the catalyst.

The polar vortex has started to break down, and NOAA’s outlooks now show cold in the east early and the west and south later, where last week they showed none. Storage is the other side of it: the surplus grew for a second week, to 54 Bcf, which is the bearish risk. Our lean is still to the upside. The polar vortex is underpriced because NOAA itself says its impacts will be short-lived, but what we care about is the positioning. This short of a market doesn’t need a long-lived major weather event, we just need a catalyst to start the move up, then forced covering of short positions will help push it higher.

Calendar: Mon 9 Nov: Qatar’s prime minister meets Trump in Washington on the Iran talks. Tue 10 Nov: EIA Short-Term Energy Outlook. Thu 12 Nov: EIA storage report for the week to 6 Nov. Fri 13 Nov: CFTC COT report. Thu 19 Nov: NOAA’s monthly and seasonal outlooks.

Below, we explain the COT for NYMEX Henry Hub and ICE Endex TTF, then Trade.

Commitment Of Traders Report

$NG: Funds are still pressing. Net short is 224k, up 9% on the week and the most in at least two years. Shorts rose 4.7% to 424k while longs didn’t move (200k). The pace is slowing though, with 19k added after 49k last week. The banks, ie. Swaps, hold the other side, net long 244k, while other reportables cut their net short by 30% as their longs jumped 14%. Looks to me like the shorts are getting more crowded, but the sellers are getting tired. These are Tuesday positions, when Dec closed at $2.895. By Friday it was $2.998, and with funds this short, that is the squeeze risk

$TTF: Funds sold into the rally. Investment funds are net long 176k GWh, down 15% on the week, after cutting 28k of longs (-7%) as TTF broke €100. Shorts barely moved (+2%). The intermediaries on the other side covered 41k of their shorts, but are still net short 397k. These are Friday 30 October positions, at the top. TTF has since fallen 18% to €85.59. Looks to me like funds took some profit at €100 but still held 356k of longs going into the drop. Next week’s data will show whether they held on.

TRADE

Maintaining trade guidance as the same as the prior 2 reports. Since Monday 2nd Nov, the Natty market is up 9.7% and rising rapidly.

That’s the report!